What is what-if analysis?

What-if analysis, defined

A strategic planning technique called a "what-if analysis" modifies formula input variables to assist companies in modelling various situations.

For finance teams, the study creates a baseline financial model and explains how many factors can affect a company's financial performance.

Because the what-if analysis promotes data-driven decision-making and precise forecasting, the process is crucial for organisations. Sensitivity analysis and scenario analysis both benefit from it. Additionally, it is beneficial to the risk management function and integrated financial planning.

The primary characteristic that distinguishes financial planning and analysis (FP&A) teams is increasingly adaptability. The transition to machine learning (ML) models and artificial intelligence (AI) technologies integrated into what-if analysis is at the heart of this adaptability.

This technologically advanced method goes beyond what conventional what-if analysis can accomplish by using AI for forecasting to extract useful and distinctive insights, automate tasks, and promote well-informed decision-making.

How does what-if analysis work?

In general, what-if analysis looks at possible changes to one or more variables, either positive or negative. They are also known as assumptions, and depending on the circumstances, they may be small adjustments or significant swings.

What-if analysis typically examines potential positive or negative changes to one or more variables. They are also referred to as assumptions, and they can be minor modifications or large fluctuations, depending on the situation.

With the direct Excel spreadsheet integration provided by modern FP&A tools, businesses can easily organize and clean their data and integrate it with current systems, like enterprise resource planning (ERP) systems. Additionally, these tools can provide finance automation tools to expedite the analysis process and AI in financial modeling functions.

Finance teams can then create scenarios using a variety of what-if analysis tools.
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Scenario manager: This feature allows users to create and save several sets of values (scenarios) and compare their results. It is accessed via a dialog box. Without the need to manually type different values or compare the best-case and worst-case scenarios side by side, the scenario manager generates various scenarios.

Goal Seek: This what-if analysis tool computes a formula in reverse to determine the input value needed for a changing cell to produce a particular result. For example, the finance team can use Goal Seek to identify the required input if the target value in the result cells is USD 50,000 in profit. The input may also indicate the number of units that must be sold in order to meet the goal.

Data tables are organized collections of cells that intersect at rows and columns. For them to work, they frequently need a particular row input cell or column input cell. The purpose of this tool is to store and present data consistently. By using a particular cell reference, finance teams can generate several data tables with various input values and analyze the effects of those minor adjustments on a financial model.

Types of what-if analysis

Scenario analysis and sensitivity analysis are the two main approaches to what-if analysis.

Goal Seek analysis, simulation analysis, and scenario planning are additional specialized methods.

Scenario analysis

When assessing the effects of several changes and unidentified market variables, scenario analysis is most helpful. This procedure assesses the effects of possible future occurrences or scenarios. Changes in the market, adjustments to tax rates, or increases in service costs are examples of scenario modifications.

Scenario analysis is used in financial modeling to project changes in cash flow and company value. Usually, the scenarios are separated into three categories: base-case, worst-case, and best-case. Finance teams use this analysis to assess desired outcomes and comprehend potential outcomes.

Sensitivity analysis

A sensitivity analysis looks at the effects of independent variables on a particular dependent variable under particular circumstances. The method works best for a company that wants to concentrate on a single objective and how a single variable might impact the annual financial goal or overall budget.

Financial analysts will assess this approach's effect on an organization's profit margin within predetermined parameters set by the input variables. Excel data analysis is a potent tool for businesses trying to give their financial models more legitimacy.